31 May

Canadian economy grows 3.9% in first quarter


Posted by: Mike Hattim

  • By Julian Beltrame

Canada’s economy expanded an impressive 3.9 per cent in the first three months of this year, but there was little cheering in markets with the performance.

Not only was the number slightly below the four per cent consensus expectation, but the elements of growth clearly signalled a sharp braking in the economy ahead.

The most encouraging news in the much-awaited Statistics Canada report Monday is that the last month of the quarter — March — saw a gross domestic pick-up of 0.3 per cent, slightly above consensus.

“Its not just the headline that matters. It’s the composition of (first quarter) growth that is disconcerting,” said Derek Holt, vice president of economics with Scotiabank.

The composition included a heavy dose of production placed in storage awaiting future sales, with inventory build-up accounting for three quarters of the growth. Meanwhile, consumers were in hibernation, contributing only 0.1 percentage points to growth, and net trade was a drag, with the solid 1.6 per cent rise in exports from the previous quarter swamped by a 2.2 per cent gain in imports.

The bright spots were in business investment, manufacturing and housing.

Statistics Canada also made several revisions Monday, upgrading 2010 growth a notch to 3.2 per cent, but downgrading 2009 three ticks to a loss of 2.8 per cent, making it the second worst year for the Canadian economy in half a century. As well, the agency trimmed growth in the fourth quarter of 2010 to 3.1 per cent from 3.3.

Markets reacted negatively to the report initially, shaving one-tenth of a point off the loonie to 102.35 cents US.

The Canadian quarter was still much better than the U.S.’s 1.8 per cent advance, but it was below the Bank of Canada’s call for a 4.2 per cent pick-up.

The central bank expects the second quarter, which ends on June 30, to slow to two per cent, but analysts said it could come in lower given the headwinds building in the world economy.

For the Bank of Canada, the report largely removes any question that governor Mark Carney will do anything but stand pat for another interest rate setting Tuesday, leaving the policy rate at one per cent.

Last week, several Canadian banks trimmed mortgage rates in another signal that the cost of borrowing will likely remain at very attractive levels for some time.

Bank of Montreal economist Douglas Porter said the omens are pointing a slower momentum for the economy than the central bank had projected in the spring, which should give Carney reason to remain inactive.

“A couple of weeks ago we pushed back our forecast on the first rate increase to September, and if anything, the risks are that the bank may wait even longer than that,” Porter said. Holt believes the bank may stay interest rate hikes until the end of the year.

Economists have also sounded a mild alarm on the global economy due to the aftershock of the Japan natural and nuclear disaster, the dampening impact of high oil prices and renewed concerns over government debt in Europe and the U.S.

The expectation is that Canadians likely saw the best the economy has to offer in the first quarter, although as yet no reputable economist is predicting an outright contraction.

In the first three months, all major industrial sectors, except for retail trade and arts, entertainment and recreation, increased their output.

Goods production rose 1.8 per cent from the previous quarter while service-producing industries increased 0.7.

Manufacturing as well as mining and oil-and-gas extraction were the largest contributors to growth.

Construction, transportation and wholesale trade also recorded notable increases.

31 May

5 things to ask when buying a cottage


Posted by: Mike Hattim

By Mark Weisleder

Buying a house in the city or suburbs can be complicated enough, but buying a cottage or vacation property outside of town requires even more due diligence.

In town, you probably wouldn’t ask if the water coming out of the tap is drinkable. Nor would you wonder if the plumbing was hooked up to the sanitary sewer. But these are exactly the sorts of questions you should ask when buying a cottage, plus a few more.

1. Get an inspection: Cottages are usually occasional residences and so may not be as properly maintained as they should be. This is why every purchase should be conditional a satisfactory professional home inspection. If the cottage has a wood-burning stove or fireplace, then a certificate must be requested from a Wood Energy Technical Transfer specialist, to confirm that the system was installed and is operating correctly.

2. Is the water drinkable? There are two areas of potential concern when it comes to water – the quantity and quality. Is there enough to satisfy family needs and is it good enough to pass the local health department requirements.

Ask the sellers for these things:

 A potability certificate from the local health authority, confirming the water is safe to drink;

 Confirmation that the well, the pump and related equipment have performed adequately during the Seller’s occupancy;

 Confirmation that there is an adequate rate of flow for normal household use;

 Provision of a well driller’s certificate, if available; and

 The location of the well.

A separate inspection may be needed by a well specialist. If nothing else it gives you an idea of what it would cost to replace the well if it fails.

3. How’s the septic system? Septic systems present their own difficulties because it is usually difficult to tell during an inspection how long the system may last. The replacement cost can be up to $20,000, especially if there are stringent environmental regulations in effect in your area.

Buyers should ask for confirmation that:

 The system was installed with all necessary permits;

 The system has been adequately maintained;

 The seller is not aware of any malfunctions;

 The seller will provide copies of any inspection or approval reports in their possession;

 The seller agrees to pump out the tank at their expense prior to closing; and

 There are no work orders on file with the Ministry of the Environment or the local municipality.

The buyer should arrange for their own separate inspection of the system itself.

4. What’s the road allowance? Even if your cottage fronts on water, this does not give you ownership of the land up to the lake. The first 66 feet fronting onto the lake is typically owned by the local municipality and is referred to as the shore road allowance.

Although you have access to the water, you can’t stop others from using it. Nor can you build anything on that 66-foot piece of land. Many cottagers have found out afterwards that either all or part of their cottage was built on land that they do not own.

You may be able to buy the land from the municipality, but it is a process. If you can get an up to date survey from the seller, this should answer your questions. Also inquire to make sure that any required permits were obtained to build a dock or boathouse, as there is no automatic right to do this. In all cases, make sure you have title insurance, which should assist with most of these types of issues.

5. Access to the cottage: If you do not have year round access by a city road, then you must ask how you get from the road to your property. If it is a private right of way over a neighbour’s land, you must understand the terms of this agreement to ensure it is year round access and it is clear who is responsible for maintaining the road.

If there is no registered right of way, it can be a nightmare, with owners fighting over who has the right of way and who owns it.

For all of these reasons, it is recommended that buyers work with a local real estate agent who should be familiar not only with each of these issues, but more importantly, will be able to recommend the professional inspectors and town officials who can satisfy a buyer’s concerns.

By being properly prepared before buying a cottage, you will avoid unwelcome surprises after closing.

30 May

Rate hike holding likely to keep housing hot


Posted by: Mike Hattim

Eric Lam, Financial Post

With the Bank of Canada now widely expected to hold off on a rate hike at least until autumn, house prices in Canada are likely going to stay hot for a few months longer.

The central bank will again leave its benchmark lending rate unchanged at 1% at its regular policy announcement on Tuesday, according to the unanimous result of 22 economists surveyed by Bloomberg News.

With signs the U.S. and global economies have entered a soft patch and the European debt crisis continuing to roil, most economists do not expect the bank to raise its overnight target rate until at least September. That would mark a full year on hold for the bank, which last raised rates in September 2010.

The upshot is, these ultra-low lending rates will continue to a fuel a Canadian housing market that appears in full spring bloom. Average prices hit $372,544 in April, up 8% year over year for the third straight month, led by a supercharged Vancouver market.

“It will lead to more strength in housing in the near term than anticipated, and the slowdown in housing will be more of a 2012 story,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank, in an interview.

TD and economists at Royal Bank of Canada and Bank of Montreal have recently pushed their expectations for a hike back to September. TD and Royal forecast the rate to settle at 1.75% by the end of the year, while BMO does not expect it to rise past 1.50%.

Mr. Burleton figures homes are at least 10% overpriced. Extending a low-borrowing environment into the prime summer shopping season would encourage more prospective buyers to take the plunge, creating even better pricing opportunities for sellers.

However, Phil Soper, chief executive of Royal LePage Real Estate Services, said recent price increases have been driven by intense foreign investment in Vancouver, especially from newly cash-rich investors from China, and not low interest rates.

“Much of it is concentrated in a few neighbourhoods, which have attracted Asian investors who use largely cash,” Mr. Soper said. “Also, there just aren’t enough homes for sale in Canada right now. An increase in the cost of buying would not impact the supply side at all. In general, the pent-up demand for housing that grew during the recession has been exhausted.”

Data from Re/Max Canada showed that 747 homes in the Greater Vancouver Area sold for $2-million or more between January and April 2011, a 118% increase on 2010, the biggest increase by far. To compare, 435 homes sold for $1.5-million or more in the Greater Toronto Area in the same time period, a 9% increase on 2010.

“When you take Vancouver out of the equation, the rate of house price appreciation is cut in half,” Mr. Soper said.

Doug Porter, deputy chief economist at BMO Capital Markets, agreed that Vancouver has skewed averages.

“We aren’t calling for a massive correction on the market, but Vancouver is a market unto itself, and it’s certainly at risk of a full-fledged correction in the years ahead,” he said. “But most other major markets don’t seem to have broken from fundamentals. The likely outcome is a long period of sub-par increases or flatness for prices.”

Mr. Burleton said even the small rate hikes forecast for the end of the year are unlikely to have much of a material impact on the economy.

“I don’t see the impact being dramatic. We’re really talking about a quarter difference here, and part of the Bank of Canada’s job is being done by the high Canadian dollar, so there’s some wiggle room,” Mr. Burleton said. “There’s a good likelihood the increase next year will be accelerated to some extent to make up for some of the lost ground this year. Most of the action on the interest-rate front will happen in 2012.”

27 May

Banks face lending squeeze


Posted by: Mike Hattim

John Greenwood, Financial Post

Economic uncertainty and rising concern about consumer debt levels are shaking up the cozy world of Canadian banking, forcing players to compete ever more fiercely on rates just to preserve market share.

Canadian Imperial Bank of Commerce and TorontoDominion Bank, which reported lower-than-expected second-quarter results Thursday, both acknowledged that intense competition in their core business has resulted in lower net interest margins -the difference between what it costs them to borrow funds and what they charge customers.

Speaking on an analyst conference call, Tim Hockey, head of TD’s Canadian banking operation, said he expects the market “to continue to be quite competitive” and that will “keep up the pressure on margins.”

TD posted second-quarter profit of $1.3-billion, or $1.46 a share, up 13% on the back of higher loan volumes and lower credit provisions. The main driver was the domestic retail operation which posted income of $847-million, up 11% from the same period last year on higher loan volumes.

Meanwhile, the U.S. business had a profit of US$315million, about flat with the previous quarter but 31% higher than the same period in 2010.

The main reason for the stronger results was a drop in provisions for bad loans as Canada’s second-largest bank set aside $343-million of provisions for credit losses in the three months ended April 30, compared to $414-million in the previous quarter and $365-million in the same period last year.

CIBC’s results reflected a similar theme as the country’s fifth-largest bank reported a profit of $678-million, or $1.60 a share, up 3% on falling credit loss provisions.

The retail lending business had net income of $553-million, up $66-million as the bank benefited from higher loan volumes.

CIBC set aside $194-million in provisions for bad loans in the second quarter, compared to $316-million last year.

Since the end of the financial crisis in 2009 the banks have been steadily lowering credit provisions to the point that they are now close to the level they were at before the turmoil began. Analysts said the problem is that players are left with less room to lower provisions in the future, taking away what has been an important earnings driver.

At the same time banks are competing harder than ever for business and that’s forcing them to accept lower rates on loans and other products in order to hold onto their place in the market.

TD’s net interest margin in the second quarter was 2.78%, down 14 basis points from last year. By comparison, the net interest margin at CIBC Retail Markets fell to 2.79%, the lowest since the second quarter of 2009.

In the aftermath of the crisis the economy recovered and consumers started spending again, and the impact on real estate -and bank’s mortgage portfolios -was dramatic. But in the face of growing uncertainty about the economy and the realization on the part of consumers that they need to pay down debt consumers are borrowing less and at the same time businesses have yet to take up the slack. That’s putting pressure on lenders, forcing them to cut prices to hold onto marketshare.

At first, conventional wisdom was that the price competition would be transitory and that the industry would return to more normal conditions but players have come to “the realization that this is going to be a more competitive market for banks than it has been historically,” said Brad Smith, an analyst at Stonecap Securities.

Shares in CIBC fell $3.30, to $81.15. TD slipped $1.27, closing at $84.02.

Analysts said pressure on lenders is set get even tighter as consumers respond to tougher mortgage rules by buying fewer homes and cranking back on credit card debt.

Bank of Montreal kicked off earnings season on Wednesday, posting income of $800million, ahead of analysts estimates. National Bank of Canada, which came out Thursday, also exceeded expectations.

The pressure on lenders is exacerbated by declining activity in capital markets. A key driver in the aftermath of the crisis, the banks’ capital markets operations have run into trouble in recent quarters amid a slump in trading opportunities and renewed sovereign debt concerns.

Next to report results is Royal Bank of Canada -the country’s largest bank and most valuable corporation -which comes out Friday.

26 May

You – Through the eyes of a Mortgage Lender


Posted by: Mike Hattim

On Tuesday May 24, 2011

If you’re a newcomer to Canada, self-employed, work on commission or have a poor credit history, you may think your chances of qualifying for a mortgage or refinancing are slim to none. Think again. It is often possible to find a way – the trick is seeing yourself through the eyes of a mortgage lender.

The 5 C’s of borrowing

Mortgage lenders look for certain characteristics in potential borrowers. Generally, they’re attracted by five key criteria:

  • Capacity — whether your income is sufficient to repay the mortgage once all your other debts are factored in.
  • Capital — whether the size of your down payment indicates a serious commitment to the property on your part, and sufficient minimization of risk on the part of the lender.
  • Collateral — whether the property is of sufficient value and marketability to cover the amount borrowed.
  • Character — your reputation and reliability, usually based on factors such as your education, employment history and residence.
  • Credit — your history of meeting credit obligations, which is based on credit-bureau records for the past six years.

If your qualifications are less than stellar in any of these areas, a traditional lender may not accept you. But that doesn’t necessarily mean you can’t get a mortgage. Like we said before, it is possible! You just need to find the right match.

Bringing your best qualities to light

Many lenders may be perfectly willing to accept you as long as they view you as a reasonable credit risk overall. For example, if you are new to Canada, lenders may consider you based on the steady nature of your employment or the size of your down payment.

Likewise, if you are newly self-employed and can’t prove a regular income, the lender may instead look at your debt load, credit history and business plan. If these are all very positive, the fact that you don’t have an earnings history may not be so important.

And if your financial reputation is marred by a poor credit history, but you’ve have taken discernable steps to improve your rating and your debts are under control, your current income and down payment may be enough compensation.

Finding your perfect mortgage match

Each mortgage lender has its own particular requirements. Professional advice can go a long way in helping you find the right one. The right lender will be a good match for your situation, so that the mortgage you get meets your needs.

A financial professional can also help you put the steps in place so that you can make the most out of your best qualities and help you overcome mortgage hurdles — whether they’re real or perceived. Remember thatyou are most often your own worst critic. Let others see the good.

25 May

Bank of Canada rate hike on hold until September: RBC


Posted by: Mike Hattim

  May 24, 2011

The Bank of Canada’s plan to raise interest rates and exit its stimulus program has been delayed to September due to renewed uncertainty about the fiscal crunch in Europe and its potential spillover effects into Canada, the team at RBC Economics said Tuesday.

Dawn Desjardins, assistant chief economist with RBC, expects the BoC to maintain its 1.00% rate until September, and has cut the forecast rate to 1.75% by the end of 2011 from 2.00%. RBC maintains expectations for the overnight rate to hit 2.5% in mid-2012, and forecast GDP growth of 3.2% in 2011 and 3.1% in 2012.

RBC had originally forecasted rate hikes in July, September, October and December this year. The bank now only expects hikes in September, October and December, Ms. Desjardins said in an e-mail.

“Combined with already-present downside risks to domestic growth in the second quarter, the Bank of Canada is likely to remain on the sidelines longer than we previously thought,” she said in a note to clients. “Complicating the outlook are global developments with the European sovereign debt crisis bringing fiscal and debt rating concerns to the forefront for investors. In the United States, economic surprises have been to the downside.”

So far, the Canadian economy looks to be holding steady with data suggesting 0.3% growth in March after a dip in February. Monthly growth figures put the economy on pace for 3.7% growth with risks on the upside.

Persistent strength in housing and growth in household credit, however, means the BoC cannot wait too long before taking action to avoid inflationary pressure.

“On balance we remain comfortable with our forecast of real GDP growth of 2.8% annualized in the second quarter although unlike in the first quarter where the risks are to the upside, the risks to our Q2 forecast are to the downside,” she said.

24 May

Surprise: Low interest rates seen sticking around


Posted by: Mike Hattim

From Tuesday’s Globe and Mail

Interest rates have recently being going somewhere unexpected: down.

At their trough last week, the yields on 10-year U.S. Treasuries, the benchmark North American rate, touched 3.11 per cent, the lowest level in six months and more than half a percentage point below their February peak.

Yields on 10-year Government of Canada bonds have fallen, too, and are now virtually identical to their U.S. counterparts.

The sliding rates have surprised many market watchers. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.

While predicting the future for rates is notoriously difficult, some observers believe that the current low-rate environment may continue for a while. If so, it will mean pain for savers, but good news for borrowers.

A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they’re in no immediate need of funds. A case in point is Google Inc., which has $37-billion (U.S.) in cash and marketable securities on its balance sheet, but raised $3-billion from a bond issue last week anyway. Mortgage rates have fallen, too – good news for homeowners looking to refinance.

But lower rates have not turned out so well for some of the market’s savviest players, including Bill Gross, the founder of Pimco, the world’s biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds.

It’s difficult to fault his logic: only a few months ago, the case for higher interest rates seemed so compelling.

Governments around the world are carrying bloated deficits and massive borrowing needs. In the United States, politicians have yet to agree on any clear path to deficit reduction, despite more than $1-trillion in annual red ink. Meanwhile, oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative.

And the U.S. Federal Reserve is no longer putting its thumb on the scale. In less than six weeks, it is going to end its program of quantitative easing, under which it is buying $600-billion in Treasuries to goose the economy. Many bond-market followers believe the Fed’s massive buying binge has been propping up Treasury prices and keeping yields artificially low.

So what has been pushing rates lower in recent months?

A weaker-than-expected recovery is the major culprit. “The global economy, and the U.S. economy in particular, is not on quite as solid a recovery track as people were imagining in the very optimistic days of six months or so ago,” observes Peter Buchanan, senior economist at CIBC World Markets.

A slew of recent statistics underlines that weakness, ranging from the poor state of U.S. home sales to the slowing pace of U.S. manufacturing growth. Meanwhile, the Japanese economy, the world’s third-largest, is shrinking and creating a further drag on global commerce, although few foresee a double-dip recession.

“We’re looking ahead toward a bit of a cooling in economic growth,” said Paul Dales, senior U.S. economist at Capital Economics, who foresees output in the U.S. rising about 2 per cent this year.

That level of growth won’t be “anything to celebrate but it’s nothing like the recession we saw previously,” he said.

Another factor driving rates lower has been the early May rout in commodities, which dampened some of the worry on the inflation front. In addition, the recent sluggish performance of the stock market suggests that investors are getting nervous and growing more willing to buy super-safe government bonds.

Mr. Dales believes the current trends have room to run, and that rates will surprise to the downside.

He predicts U.S. 10-year Treasury yields could slip to 2.5 per cent in the low-growth, less inflation-spooked environment he foresees ahead.

If growth continues to be slow, lower rates might be staying around for a while.

Mr. Buchanan says the most likely scenario, given the poorer economic outlook, is for the Fed to hold off on raising rates until 2013. He believes the yield on Treasuries will rise gradually, instead of falling further, getting back to 3.4 per cent by the end of this year and to 4 per cent by the end of 2012.

20 May

Home ownership harder in first-quarter as prices rise, mortgage rates flat: RBC


Posted by: Mike Hattim

By The Canadian Press

Home ownership became less affordable during the first quarter, especially in Vancouver where it took nearly three-quarters of family income to pay for mortgages, property taxes and utilities, according to an RBC Economics report.

RBC said that while a detached bungalow in Vancouver ate up an average 72.1 per cent of income, up 3.4 percentage points, while costs in other major Canadian cities were also on the rise.

In Toronto, housing expenses ate up an average of 47.5 per cent of income (up 0.8 of a percentage point), while in Montreal it was 43.1 per cent (up two percentage points), and Calgary devoured 35.9 per cent of income (up 0.9 of a percentage point).

Other key cities like Ottawa expenses took 39 per cent of income (up 0.4 of a percentage point) and in Edmonton it was 31.5 per cent (up 0.5 of a percentage point).

The bank’s affordability scale, which measures the proportion of pre-tax household income needed to pay mortgages, finds that all three major housing types were less affordable in the first quarter.

The amount of income taken up by housing costs on a detached bungalow rose 0.7 of a percentage point to 40.5 per cent. The figures for a standard two-storey home and a condominium both rose 0.2 of a percentage point to 46.2 and 27.7 per cent, respectively.

The association said national sales activity in each of the first three months of 2011 ran close to five- and 10-year monthly averages. However, home prices were up about eight per cent from the year earlier.

That followed an easing of the burden in the second half of 2010, largely due to falling long-term mortgage rates.

Home ownership costs could continue to rise as the Bank of Canada is expected to soon resume raising short-term interest rates, but expected growth in household incomes will likely soften the blow, said senior economist Robert Hogue.

“Interest rates will likely soon start to rise again, leading to a period of steady increases in homeownership costs. This, in turn, will contribute to a flattening in Canadian housing demand going forward,” said Hogue.

“We could experience some turbulence this spring and summer, given that new tighter mortgage lending rules in March and April likely shifted home buying activity to earlier in the year.”

Home owners in British Columbia, where sales of multi-million dollar homes are surging, particularly in Vancouver. Quebecers also saw noticeable rises in home ownership costs.

The picture was mixed in other parts of the country, with Ontario, Alberta and Saskatchewan seeing ups and downs, depending on the housing type.

“Despite the latest erosion in affordability, provincial levels generally continue to stand near their long-term averages, suggesting that owning a home remains affordable or, at worst, slightly unaffordable across Canada – with Vancouver being a notable exception,” Hogue said.

19 May

Home prices continue climb


Posted by: Mike Hattim

  May 17, 2011

Canadian home prices continued their upward march in April, driven by strong investor demand in Vancouver, as cracks in the Toronto condominium market may be starting to appear.

The Canadian Real Estate Association said Tuesday the average price of a home sold in April in Canada was $372,544, up 8% from a year ago. It was the third straight month that the average price rose 8% on a year-over-year basis but the Ottawa-based group cautioned that the figure was skewed due to “surging multimillion-dollar property sales in selected areas of Greater Vancouver.”

The group also shrugged off slow April sales, which dipped 4.4% from March on a seasonally adjusted annual basis and 14.7% on an actual basis from a year earlier. The slow sales are said to have been driven by new mortgage rules that came into effect April 19 and made borrowing tougher, leading people to rush into purchases in March.

The same sort of impact was felt in April 2010. Purchases moved forward to avoid mortgage rule changes, higher interest rates were feared and the harmonized sales tax loomed in two provinces.

“This makes it difficult to compare,” said Gregory Klump, chief economist of CREA. “Changes to mortgage regulations that took effect in April 2011 likely sidelined a number of first-time homebuyers. By contrast, higher-end homes sales in Greater Vancouver and Toronto had their best April ever.”

Worries about the sustainability of the housing market could be stoked by a report from Urbanation Inc., which monitors the Toronto condominium market. The group says more than 50% of condominiums purchased in the last year were by buyers who do not intend to occupy their units and plan to rent in many instances.

Condominium rents in Toronto in the first quarter of 2011 were $2.11 per square foot compared to $2.09 a year earlier, a 0.8% increase. Condominiums being registered now and ready to be occupied are priced for sale at $450 per square foot range while newer units are going for $550 per square foot.

“What happens when these newer units hit the market?” said Ben Myers, executive vice-president of Urbanation. “At $550 per square foot a 750 square feet [condominium] is $413,000. You put 25% down and you have a mortgage of $310,000. Take a five-year variable rate mortgage at 3% with 25-year amortization and you get $1,475 a month mortgage. Your condo fee is $345, property tax is another $345 and you are up to $2,200 in carrying costs. That’s a huge [operating] loss [given the average rental rate would bring in just under $1,600/month]. People are buying these for capital appreciation.”

Don Lawby, chief executive of Century 21 Canada, says the housing market has been affected by foreign investors — notably Chinese — who have reacted to tougher tax rules in their home country by investing abroad.

“They are buying investment properties and not just in Vancouver but to some degree in Ontario and Calgary,” said Mr. Lawby, adding many of those investors are not concerned with carrying costs. “They are not afraid to offer above price and they are not afraid to get into a bidding war.”

Nevertheless, Mr. Lawby says while these investors are skewing national averages, he maintains the overall numbers are small and the impact on the larger market minimal.

Toronto-Dominion economic analyst Leslie Preston said while April numbers present a market with falling sales and rising prices, she agreed market conditions were exaggerated by some one-time issues.

“I think the effect in April was a little larger and I would expect to see a bit of bounceback in May because of the decline,” says Ms. Preston. “But we have been calling for awhile now for a mild softening in Canadian housing markets overall this year, particularly as interest rates rise.”

19 May

The wealth effect


Posted by: Mike Hattim

Garry Marr, Financial Post · May 14, 2011

We are a cocky lot in Canada about our wealth with millionaires apparently abounding everywhere.

Our confidence probably got another boost with a report from the Deloitte Center for Financial Services saying there were 1,745,000 households in Canada with more than $1-million in assets in 2011.

Not bad, but should some of these people really think of themselves as millionaires when an inordinate amount of their wealth is concentrated in an asset they have little intention of selling?

Even among the top 1% of millionaire Canadian households, the Deloitte study found 21% of their wealth was tied up in their home. The percentage isn’t broken out but you have to wonder how much wealth the bottom 1% of Canadian millionaire households have tied up in their homes.

If you listen to the naysayers in the Canadian housing industry, this wealth is fleeting — though they’ve been saying this for about two years and have missed a lot of price appreciation sitting on the sidelines.

Still, you have to wonder how Canadians would be feeling about their wealth today if we had suffered the same fate as the Americans.

A new report seems to indicate the worst may not be over for the U.S. housing industry, with real estate website Zillow.com saying 28.4% of households have negative equity — mortgages worth than the value of a home.

Prices in the U.S. peaked in June 2006 and on average are now down 29.5% from that high.

Say the same thing had happened in Canada. How would that make you feel about your wealth? The Canadian Real Estate Association says it expects house prices to climb another 4% this year to an average of $352,500.

But let’s lay out a different scenario. You bought your home in 2006 when the average price of a home in Canada was $277,211. Now it’s worth 29.5% less or $81,777. Add that figure together with the lost appreciation since 2006 and your average Canadian homeowner’s net worth drops $157,066.

I have a feeling a few millionaires would drop off the Deloitte list.

“You are only a millionaire when you capture your equity and put your house up for sale,” says Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals (CAAMP). “Your home is the biggest part of your financial plan and a lot of people feel they have a lot of equity in their home.”

The latest statistics from CAAMP show Canadians have not been shy about drawing on their home wealth — with $26-billion in equity takeouts in the last year or about $30,000 per household.

Not all of it is reckless spending with 36% of households using their equity for renovations and repair.

But the survey also found another 19% are using their equity for debt consolidation and repayment, meaning they could be covering up spending elsewhere.

David Rosenberg, chief economist with Gluskin Sheff & Associates, says when he thinks of true millionaires, he tends just to consider their liquid assets.

“Housing has an unusual split personality between being an investment but also being a consumption good,” Mr. Rosenberg says.

He says that feeling about being wealthy because of the value of your home is not unusual and people will spend based on that perception.

“There is nothing that dominates consumer spending more than employment and income, but you can get into other layers that affect consumer spending and confidence and the wealth effect is pretty important,” says Mr. Rosenberg, noting 20% of Canadians own stock but 70% own a home. “On the household balance sheet, the house is the bedrock. Seeing your house price go up, believing — true or not — that you are wealthier will trigger the subconscious decision to reduce your savings rate.”

Interestingly enough, the savings rate in Canada in 2011 is down to 3.51%, according to the Deloitte study. The U.S. savings rate climbed to 6.26%.

Edmonton-based certified financial planner Al Nagy, of Investors Group, says he doesn’t consider the value of a home as part of a retirement plan.

“It’s part of the net worth, but ultimately, the home is a roof over your head and typically it is not used as source of funding,” Mr. Nagy says. “I still include the house when I calculate net worth because people really want to know what their tangible net worth is.”

It’s one thing to know what your net worth is, but if it’s tied up in your house and you don’t ever plan to sell, even if the Canadian housing market doesn’t fall apart, what’s it worth to you?